To Reaffirm or Not To Reaffirm

Congress recognizes that in the real world, sometimes a reaffirmation agreement is not filed. When that happens, the discharge injunction prohibits contact with the debtor concerning the debt. However, in a fit of practical wisdom, Congress enacted Section 524(j) which allows a creditor holding a mortgage on the debtor’s principal residence to accept payments in the ordinary course of business from the debtor without violating the bankruptcy court’s discharge injunction. A debtor may continue to pay his home mortgage and the debtor may accept payments even when the debtor’s personal obligation was discharged by the bankruptcy case.

Many bankruptcy attorneys refuse to allow their clients to execute reaffirmation agreements on real estate. Some plainly state that it is malpractice to reaffirm a mortgage. The issue of the non-recourse mortgage is undecided and replete with potential perils for the debtor. Should a Circuit Court determine that a Chapter 7 debtor must reaffirm a mortgage, then the property may no longer be protected by the bankruptcy and the creditor may assert its state law rights and accelerate the mortgage debt and foreclose on the property even though the debtor is current on the loan. A similar situation with an auto loan was discussed in the Ninth Circuit Court of Appeals case Dumont v. Ford Motor Credit Company (In re Dumont), 581 F. 3d 1104 (9th Cir. 2009).

A more practical (and perhaps a more important) question to ask before deciding to reject a mortgage reaffirmation agreement is, “If I don’t reaffirm my mortgage loan, will I be able to modify my loan in the future?” This question is best answered by looking at two current government backed housing programs: HAMP and HARP. Under the Home Affordable Modification Program (H.A.M.P.), a mortgage may be modified (modification) even though the debt was not reaffirmed. See U.S. Dep’t of the Treasury, Making Home Affordable Program: Handbook for Servicers of Non-GSE Mortgages v4.3 (2013). Under the Home Affordable Refinance Program (H.A.R.P.) the debtor is not eligible for refinancing. The reason is that the modification only changes the terms of the loan and does not expand upon or create a new personal obligation. However, refinancing clearly creates a new financial obligation for the debtor, and violates the bankruptcy court’s discharge injunction. Some lenders refuse to modify a home mortgage if the debtor did not execute a reaffirmation agreement and is no longer personally liable for the debt.

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